Trading the News: Bank of England Quarterly Inflation Report

What's Expected:

Time of release: 08/10/2011 9:30 GMT, 5:30 EDT

Primary Pair Impact:GBPUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

The Bank of England may soften its outlook for inflation given the slowing recovery in the U.K., and the British Pound may break out of its recent range should the central bank show an increased willingness to expand its asset purchase program beyond the GBP 200B target. At the same time, the BoE may see a heightening risk for a double-dip recession, and speculation for further easing may lead the GBP/USD to give back the advance carried over from the previous month as interest rate expectations falter. However, Governor Mervyn King may talk down speculation for additional monetary stimulus as price growth remains well above the 2% target, and the central bank head may see scope to lift the benchmark interest rate off of the record-low in an effort to stem the risk for inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

Net Consumer Credit

0.3B

0.4B

Retail Sales ex Auto Fuel (MoM) (JUN)

0.5%

0.8%

Average Weekly Earnings ex Bonus (3MoY) (MAY)

2.0%

2.1%

The Downside

Release

Expected

Actual

Gross Domestic Product (QoQ) (2Q A)

0.2%

0.2%

Jobless Claims Change (JUN)

15.0K

24.5K

Consumer Price Index (YoY) (JUN)

4.5%

4.2%

The expansion in private sector activity paired with the rise in wage growth certainly raises the risk for inflation, and the central bank may abandon its wait-and-see approach in an effort to balance the risks for the economy. However, the tepid pace of growth paired with the ongoing weakness within the labor market may lead the BoE to lower its outlook for the region, and the central bank may see scope to implement additional monetary stimulus in order to encourage a sustainable recovery. In turn, dovish comments from the central bank is likely to weigh on the exchange rate, and a bearish breakout in the GBP/USD may threaten the rebound from 1.5781 as market participants curb expectations for a rate hike later this year.

Potential Price Targets For The Release

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How To Trade This Event Risk

Trading the BoE quarterly inflation report is certainly not as clear cut as some of our previous trades, but the updated forecast could set the stage for a long British Pound trade should the central bank raise its outlook for inflation. Therefore, if policy makers still see price growth reaching 5 percent later this year, we will need a green, five-minute candle following the report to establish a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first target. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to lock-in our profits.

In contrast, the central bank may curb its outlook for growth and inflation as the region faces a slowing recovery, and Governor King may show an increased willingness to expand monetary policy further in an effort to balance the risks for the economy. As a result, if the central bank head sees scope to increase the asset purchase target beyond GBP 200B, we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.

Impact that the Bank of England Quarterly Inflation report has had on GBP during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2011

05/11/2011 9:30 GMT

--

--

+64

-83

May 2011 Bank of England Quarterly Inflation Report

The Bank of England lowered its growth forecast from February, stating that the recent data reflects a 'more gradual recovery,' but the central bank went onto say that the interest rate will have to be increased at 'some point' as policy makers see inflation reaching an annualized 5 percent later this year. As price growth continues to deviate from the 2 percent target, the MPC may face increased pressures to start normalizing monetary policy, and the central bank may toughen its stance against price growth in an effort to balance the risks for the region. In turn, we may see a growing shift within the committee, and we may see a greater push to lift the interest rate off of the record-low as inflation 'remains uncomfortable high.' Indeed, the British Pound surged higher following the comments, with the GBP/USD climbing back towards 1.6500, but the sterling failed to hold its ground throughout the North American trade as the exchange rate settled at 1.6342 at the end of the day.

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